NCFM Technical Analysis Module

172 Pages·2013·4.42 MB·English

Technical Analysis Module
NATIONAL STOCK EXCHANGE OF INDIA LIMITED
Test Details:
Sr. Name of Module Fees Test Duration No. of Maximum Pass Certifi cate
No. (Rs.) (in minutes) Questions Marks Marks (%) Validity
1 Financial Markets: A Beginners’ Module * 1686 120 60 100 50 5
2 Mutual Funds : A Beginners' Module 1686 120 60 100 50 5
3 Currency Derivatives: A Beginner’s Module 1686 120 60 100 50 5
4 Equity Derivatives: A Beginner’s Module 1686 120 60 100 50 5
5 Interest Rate Derivatives: A Beginner’s Module 1686 120 60 100 50 5
6 Commercial Banking in India: A Beginner’s Module 1686 120 60 100 50 5
7 Securities Market (Basic) Module 1686 120 60 100 60 5
8 Capital Market (Dealers) Module * 1686 105 60 100 50 5
9 Derivatives Market (Dealers) Module * [Please refer to footnote no. (i) ] 1686 120 60 100 60 3
10 FIMMDA-NSE Debt Market (Basic) Module 1686 120 60 100 60 5
11 Investment Analysis and Portfolio Management Module 1686 120 60 100 60 5
12 Fundamental Analysis Module 1686 120 60 100 60 5
13 Financial Markets (Advanced) Module 1686 120 60 100 60 5
14 Securities Markets (Advanced) Module 1686 120 60 100 60 5
15 Mutual Funds (Advanced) Module 1686 120 60 100 60 5
16 Banking Sector Module 1686 120 60 100 60 5
17 Insurance Module 1686 120 60 100 60 5
18 Macroeconomics for Financial Markets Module 1686 120 60 100 60 5
19 Mergers and Acquisitions Module 1686 120 60 100 60 5
20 Back Offi ce Operations Module 1686 120 60 100 60 5
21 Wealth Management Module 1686 120 60 100 60 5
22 NISM-Series-I: Currency Derivatives Certifi cation Examination 1000 120 100 100 60 3
23 NISM-Series-II-A: Registrars to an Issue and Share Transfer Agents – 1000 120 100 100 50 3
Corporate Certifi cation Examination
24 NISM-Series-II-B: Registrars to an Issue and Share Transfer Agents – 1000 120 100 100 50 3
Mutual Fund Certifi cation Examination
25 NISM-Series-IV: Interest Rate Derivatives Certifi cation Examination 1000 120 100 100 60 3
26 NISM-Series-V-A: Mutual Fund Distributors Certifi cation Examination * 1000 120 100 100 50 3
27 NISM-Series-VI: Depository Operations Certifi cation Examination 1000 120 100 100 60 3
28 NISM Series VII: Securities Operations and Risk Management 1000 120 100 100 50 3
Certifi cation Examination
29 NISM-Series-VIII: Equity Derivatives Certifi cation Examination 1000 120 100 100 60 3
30 Certifi ed Personal Financial Advisor (CPFA) Examination 4495 120 80 100 60 3
31 NSDL–Depository Operations Module 1686 75 60 100 60 # 5
32 Commodities Market Module 2022 120 60 100 50 3
33 Surveillance in Stock Exchanges Module 1686 120 50 100 60 5
34 Corporate Governance Module 1686 90 100 100 60 5
35 Compliance Offi cers (Brokers) Module 1686 120 60 100 60 5
36 Compliance Offi cers (Corporates) Module 1686 120 60 100 60 5
37 Information Security Auditors Module (Part-1) 2528 120 90 100 60 2
Information Security Auditors Module (Part-2) 2528 120 90 100 60
38 Options Trading Strategies Module 1686 120 60 100 60 5
39 Options Trading (Advanced) Module 1686 120 35 100 60 5
2247 per
40 FPSB India Exam 1 to 4** 120 75 140 60 NA
exam
41 Examination 5/Advanced Financial Planning ** 5618 240 30 100 50 NA
42 Equity Research Module ## 1686 120 65 100 55 2
43 Issue Management Module ## 1686 120 80 100 55 2
44 Market Risk Module ## 1686 120 50 100 55 2
45 Financial Modeling Module ### 1123 120 30 100 50 NA
46 Financial Services Foundation Module ### 1123 120 45 100 50 NA
* Candidates have the option to take the tests in English, Gujarati or Hindi languages.
# Candidates securing 80% or more marks in NSDL-Depository Operations Module ONLY will be certifi ed as ‘Trainers’.
** Following are the modules of Financial Planning Standards Board India (Certifi ed Financial Planner Certifi cation)
- FPSB India Exam 1 to 4 i.e. (i) Risk Analysis & Insurance Planning (ii) Retirement Planning & Employee Benefi ts (iii) Investment
Planning and (iv) Tax Planning & Estate Planning
- Examination 5/Advanced Financial Planning
## Modules of Finitiatives Learning India Pvt. Ltd. (FLIP)
### Module of IMS Proschool
The curriculum for each of the modules (except Modules of Financial Planning Standards Board India, Finitiatives Learning India Pvt. Ltd. and
IMS Proschool) is available on our website: www.nseindia.com > Education > Certifi cations.
Note: (i) NISM has specifi ed the NISM-Series-VIII-Equity Derivatives Certifi cation Examination as the requisite standard for associated persons
functioning as approved users and sales personnel of the trading member of an equity derivatives exchange or equity derivative segment of a
recognized stock exchange.
Contents

CHAPTER 1 ............................................................................................................9
INTRODUCTION TO TECHNICAL ANALYSIS ............................................................9
1.1 What is technical analysis? ...............................................................................9
1.1.1 Price discounts everything ....................................................................9
1.1.2 Price movements are not totally random ..............................................10
1.1.3 Technical Analysis: the basic assumption ..............................................11
1.1.4 Strengths and weakness of technical analysis .......................................12
1.1.4.1 Importance of technical analysis ............................................12
1.1.4.2 Weaknesses of technical analysis ...........................................13
CHAPTER 2 ..........................................................................................................16
CANDLE CHARTS ..................................................................................................16
2.1 The charts ...................................................................................................16
2.2 Candlestick analysis ......................................................................................20
2.2.1 One candle pattern ............................................................................21
2.2.1.1 Hammer ............................................................................21
2.2.1.2 Hanging man ......................................................................22
2.2.1.3 Shooting star and inverted hammer .......................................23
2.2.2 Two candle pattern ............................................................................26
2.2.2.1 Bullish engulfi ng ..................................................................26
2.2.2.2 Bearish engulfi ng ................................................................28
2.2.2.3 Piercing .............................................................................29
2.2.2.4 Bearish harami....................................................................31
2.2.2.5 Bullish harami .....................................................................33
2.2.3 Three candle pattern .........................................................................35
2.2.3.1 Evening star .......................................................................35
2.2.3.2 Morning star .......................................................................38
2.2.3.3 Doji ...................................................................................40
CHAPTER 3 ..........................................................................................................46
PATTERN STUDY ..................................................................................................46
3.1 What are support and resistance lines? ............................................................46
3.1.1 Support ........................................................................................46
3.1.2 Resistance .......................................................................................48
3.1.3 Why do support and resistance lines occurs? .........................................49
3.1.4 Support and resistance zone ...............................................................49
3.1.5 Change of support to resistance and vice versa .....................................51
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3.1.6 Why are support and resistance lines important? ...................................52
3.2 Head and shoulders ......................................................................................52
3.2.1 Head and shoulders top reversal .........................................................53
3.2.2 Inverted head and shoulders ..............................................................57
3.2.3 Head and shoulders bottom ................................................................58
3.3 Double top and double bottom .......................................................................62
3.3.1 Double top .......................................................................................63
3.3.2 Double bottom ..................................................................................66
3.3.3 Rounded top and bottom ....................................................................69
3.4 Gap theory ..................................................................................................70
3.4.1 Common gaps ..................................................................................71
3.4.2 Breakaway gaps................................................................................71
3.4.3 Runaway/continuation gap .................................................................72
3.4.4 Exhaustion gap .................................................................................73
3.4.5 Island cluster ...................................................................................74
CHAPTER 4 ........................................................................................................79
MAJOR INDICATORS & OSCILLATORS .................................................................79
4.1 What does a technical indicator offer? .............................................................79
4.1.1 Why use indicator? ............................................................................79
4.1.2 Tips for using indicators .....................................................................79
4.1.3 Types of indicators ............................................................................80
4.1.4 Simple moving average ......................................................................81
4.1.5 Exponential moving average ...............................................................81
4.1.6 Which is better? ................................................................................83
4.2 Trend following indicator ................................................................................84
4.2.1 When to use? ...................................................................................84
4.2.2 Moving average settings ....................................................................84
4.2.3 Uses of moving average .....................................................................85
4.2.4 Signals - moving average price crossover .............................................87
4.2.5 Signals - multiple moving averages .....................................................88
4.3 Oscillators ...................................................................................................89
4.3.1 Relative strength index ......................................................................89
4.3.1.1 What is momentum? ............................................................89
4.3.1.2 Applications of RSI ..............................................................90
4.3.1.3 Overbought and oversold .....................................................90
4.3.1.4 Divergence .........................................................................91
4.3.1.5 Stochastic ..........................................................................93
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4.3.1.6 William %R .......................................................................97
4.3.1.7 Real life problems in use of RSI .............................................99
4.3.1.8 Advanced concepts ..............................................................99
4.3.2 Moving average convergence/divergence(MACD) .................................102
4.3.2.1 What is the macd and how is it calculated .............................102
4.3.2.2 MACD benefi ts ..................................................................103
4.3.2.3 uses of MACD ...................................................................104
4.3.2.4 Money Flow Index .............................................................107
4.3.2.5 Bollinger Bands .................................................................109
4.4 Using multiple indicators for trading signals ....................................................110
4.4.1 Price sensitive techniques.................................................................110
4.4.2 Volume sensitive techniques .............................................................111
4.4.3 Composite methods .........................................................................111
4.4.4 How to use tool kit of trading techniques ............................................111
4.4.5 Trading market tool kit applications ...................................................112
4.4.6 Bull market tool kit application ..........................................................112
4.4.7 Bear market tool kit application.........................................................112
4.4.8 Trading market changing to bull market tool kit application ...................113
4.4.9 Trading market changing to bear market tool kit application ..................113
4.4.10 Bull market changing to trading market tool kit application ...................114
4.4.11 Bear market changing to trading market tool kit application ..................114
Chapter 5 ..........................................................................................................120
Trading Strategies .............................................................................................120
5.1 day trading ................................................................................................120
5.1.1 advantages of day trading ................................................................120
5.1.2 risks associated with risk trading .......................................................121
5.2 strategies ..................................................................................................123
5.2.1 strategies for day trading .................................................................123
5.2.2 momentum trading strategies ...........................................................123
Chapter 6 ..........................................................................................................127
Dow Theory and Elliott Wave Theory .................................................................127
6.1 Introduction ...............................................................................................127
6.2 Principles of Dow Theory .............................................................................127
6.3 Signifi cance of Dow Theory ..........................................................................133
6.4 Problems with Dow Theory ...........................................................................133
6.5 Elliot Wave ................................................................................................133
6.5.1 Introduction ...................................................................................133
6.5.2 Fundamental Concept ......................................................................133
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6.5.3 After Elliott .....................................................................................149
Chapter 7 .........................................................................................................159
Trading psychology and risk management ........................................................159
7.1 Introduction ...............................................................................................159
7.2 Risk Management .......................................................................................160
7.2.1 Components of risk management ......................................................161
7.2.1.1 Stop loss ..........................................................................161
7.2.1.2 Analyze reward risk ratio ....................................................161
7.2.1.3 Trail stop loss....................................................................161
7.2.1.4 Booking Profi t ...................................................................161
7.2.1.5 uses of stop loss ...............................................................161
7.2.1.6 qualities of successful traders .............................................161
7.2.1.7 golden rules of traders .......................................................162
7.2.1.8 do’s and don’ts in trading ...................................................162
7.3 rules to stop losing money ...........................................................................163
7.4 choosing the right market to trade ................................................................167
7.4.1 importance of discipline in trading .....................................................167
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Distribution of weights in the
Technical Analysis Module Curriculum
Chapter Title Weightages
No.
1 INTRODUCTION TO TECHNICAL ANALYSIS 12
2 CANDLE CHARTS 13
3 PATTERN STUDY 20
4 MAJOR INDICATORS & OSCILLATORS 20
5 TRADING STRATEGIES 12
6 DOW THEORY AND ELLIOT WAVE THEORY 12
7 TRADING PSYCHOLOGY AND RISK MANAGEMENT 11
Total 100
Note: Candidates are advised to refer to NSE’s website: www.nseindia.com, click on ‘Education’
link and then go to ‘Updates & Announcements’ link, regarding revisions/updations in NCFM
modules or launch of new modules, if any.
Copyright © 2013 by National Stock Exchange of India Ltd. (NSE)
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7
8
CHAPTER 1 INTRODUCTION TO TECHNICAL
ANALYSIS
Learning objectives
After studying this chapter the student should be able to understand:
• The basis of technical analysis
• The strengths and weaknesses of technical analysis
1.1 What is Technical Analysis?
Technical Analysis can be defi ned as an art and science of forecasting future prices based on
an examination of the past price movements. Technical analysis is not astrology for predicting
prices. Technical analysis is based on analyzing current demand-supply of commodities,
stocks, indices, futures or any tradable instrument.
Technical analysis involve putting stock information like prices, volumes and open interest
on a chart and applying various patterns and indicators to it in order to assess the future
price movements. The time frame in which technical analysis is applied may range from
intraday (1-minute, 5-minutes, 10-minutes, 15-minutes, 30-minutes or hourly), daily, weekly
or monthly price data to many years.
There are essentially two methods of analyzing investment opportunities in the security
market viz fundamental analysis and technical analysis. You can use fundamental information
like fi nancial and non-fi nancial aspects of the company or technical information which ignores
fundamentals and focuses on actual price movements.
The basis of Technical Analysis
What makes Technical Analysis an effective tool to analyze price behavior is explained by
following theories given by Charles Dow:
• Price discounts everything
• Price movements are not totally random
• What is more important than why
1.1.1 Price discounts everything
“Each price represents a momentary consensus of value of all market participants – large
commercial interests and small speculators, fundamental researchers, technicians and
gamblers- at the moment of transaction” – Dr Alexander Elder
9
Technical analysts believe that the current price fully refl ects all the possible material
information which could affect the price. The market price refl ects the sum knowledge of
all participants, including traders, investors, portfolio managers, buy-side analysts, sell-side
analysts, market strategist, technical analysts, fundamental analysts and many others. It
would be folly to disagree with the price set by such an impressive array of people with
impeccable credentials. Technical analysis looks at the price and what it has done in the past
and assumes it will perform similarly in future under similar circumstances. Technical analysis
looks at the price and assumes that it will perform in the same way as done in the past under
similar circumstances in future.
1.1.2 Price movements are not totally random
Technical analysis is a trend following system. Most technicians acknowledge that hundreds
of years of price charts have shown us one basic truth – prices move in trends. If prices were
always random, it would be extremely diffi cult to make money using technical analysis. A
technician believes that it is possible to identify a trend, invest or trade based on the trend
and make money as the trend unfolds. Because technical analysis can be applied to many
different time frames, it is possible to spot both short-term and long-term trends.
“What” is more important than “Why”
It is said that “A technical analyst knows the price of everything, but the value of nothing”.
Technical analysts are mainly concerned with two things:
1. The current price
2. The history of the price movement
All of you will agree that the value of any asset is only what someone is willing to pay for
it. Who needs to know why? By focusing just on price and nothing else, technical analysis
represents a direct approach. The price is the fi nal result of the fi ght between the forces of
supply and demand for any tradable instrument. The objective of analysis is to forecast the
direction of the future price. Fundamentalists are concerned with why the price is what it is.
For technicians, the why portion of the equation is too broad and many times the fundamental
reasons given are highly suspect. Technicians believe it is best to concentrate on what and
never mind why. Why did the price go up? It is simple, more buyers (demand) than sellers
(supply).
The principles of technical analysis are universally applicable. The principles of support,
resistance, trend, trading range and other aspects can be applied to any chart. Technical
analysis can be used for any time horizon; for any marketable instrument like stocks, futures
and commodities, fi xed-income securities, forex, etc
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